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The Real Price of Oil
April 30th, 2008
New York crude struck a record high of $119.93 dollars on Monday. It is at times like these that people cite supply and demand as the driving factor for oil prices. These same people very often neglect to consider the buying power of the dollar, which is a major influence of the prices we see.
Since 2000, and the days of $28 oil, the commodity has multiplied more than four times in value. However, the price of oil hasn't actually gone up quite that much globally, but rather the currency which we Americans use to purchase oil has dropped in value.
If you were to go back in time to 2000, to buy some of that good old $28 oil, using today's US dollar that same barrel of crude would cost you over $40.
If the US dollar, in a single instant, becomes worth half of its current value, guess what? Instant $220 oil. If the US dollar becomes worth twice its current value, guess what? $60 oil.
The price run-up in oil will actually be quite different for each currency. While some countries are bemoaning the increasing cost for crude, other nations with currencies that are outperforming America don't have it quite as bad.
Consider that in October of 2000, one Euro would buy you about 95 cents in American dollars. Now, one Euro will bring you nearly $1.40 US. As a result of the changing values of the currencies, Americans have experienced a sharper rise in oil prices than many other countries.
In 2000, a barrel of oil cost $28 US or a closely comparable 30 Euros, while a barrel today would run you $115, but only 82 Euros.
Therefore, oil has risen about 4 times in price for Americans, while European nations have had to deal with a rise of just less than three times. In relative terms, while oil for Americans has quadrupled in price since 2000, oil for Europeans has tripled.
Oil is a global commodity, not an American one, and every nation has been feeling the crunch. However, the pain is magnified for Americans, as our currency has been taking a dive at the same time. This means that America's economy is under even greater pressure than much of the rest of the world, as it relates to fuel prices.
People complaining at the pumps, citing supply and demand issues, should really be railing on about the weak dollar. A strengthening currency will be the first step to taking the pressure off of Americans.
A decline in the actual global value of oil, of course, would be a nice follow-up. Considering that oil is the second most common liquid on the planet, second only to water, and the global economy seems to be preparing to take a breather, I would expect to see the demand soften up a bit in the coming year. Yet, don't hold your breath waiting for $28 oil - you might pass out.